Introducing VAT in the Turks and Caicos Islands offers the opportunity to further strengthen the country’s fragile recovery by introducing a simpler, equitable and stable source of government revenue, said chief financial officer Hugh McGarel-Groves on Monday in response to a local anti-VAT campaign.
“As the community of the TCI continues to discuss the implementation of VAT, critical questions must continue to be asked of both of the government but also of the anti-VAT campaigners: what are their alternatives to the benefits of VAT to a renewed TCI; is opposition to VAT borne from a desire to continue not to pay tax at all in some business sectors?
“Given the difficulties endured by the TCI economy since the collapse of the last government, it is in the best interests of the entire community to ensure that government finances are secure and that it can continue to develop expenditure plans in line with local peoples’ priorities – a process already begun in this year’s Budget.
“VAT is a proven system across the Caribbean. It is straightforward to administer and is beneficial here in that this single form of taxation replaces five different sets of ordinances that both government and business need to keep abreast of,” McGarel-Groves said.
The VAT implementation team has prepared an update question and answer document in response to the claims made by the anti-VAT campaign:
Value Added Tax (VAT) in the Turks and Caicos Islands
A response to the anti-VAT campaign
1) Why is the Turks and Caicos introducing VAT?
TCIG is in the process of building a simpler and more unified taxation system that will restore and maintain TCIG’s fiscal balance, whilst ensuring more sustainable government revenues. A proliferation of other consumption taxes will be replaced by VAT and as the economy grows, public spending can be increased according to local priorities. By broadening the tax base Government revenues will be better protected from fluctuations in tourism, for example.
2) VAT will make the TCI less competitive than other Caribbean destinations.
Not true – this response has been taken from information contained in the VAT Green Paper. TCI will maintain a distinct competitive edge over its competitors in the mainly English speaking Eastern Caribbean.
The Green Paper makes clear that the proposed rate of VAT will be between 8.5% and 12%. Further, the preferred target is to set the rate no higher that of TCI Accommodation Tax (11%). Of the 12 Caribbean countries that have introduced VAT, only the Dominican Republic (8%) and Haiti (10%) have rates below 12%. The majority of the others have set rates between 15% and 17.5%.
Indeed, Barbados which has set a rate of 17.5%, is also largely dependent on tourism and also has income and property taxes not present in TCI. St Kitts and Nevis, which introduced VAT in 2010 and is arguably the closest economy in size and composition to TCI continues to be increasingly economically successful after the implementation of VAT there.
3) Why is VAT being rushed in only an 8 month implementation period, contrary to CARTAC’s 2 year recommendation?
Not true. Preparations for the introduction of VAT were announced and began in the Budget address of April 2011 – 24 months ahead of the planned implementation of April 2013.
The introduction of VAT has been considered for TCI since at least 2005. Indeed, the 10 year Development Plan at that time recommended the introduction of VAT in preference to other taxes such as income tax and property tax.
Further, during the consultation period, the VAT implementation team held 19 separate meetings across the family islands between 24 Apr and 08 Jun 2012 meeting with around 300 business and community groups such as the Accountants Association, Bankers Association and Chamber of Commerce.
4) Have sufficient studies been done to determine the fiscal needs of TCI’s economy and the impact of the introduction of VAT in TCI?
There were four studies/consultations conducted starting with the TCI’s own 10-year Development Plan in 2005, the Roe Report in 2009/2010 which compared the existing tax system with potential alternative tax systems and recommended VAT as the most appropriate of Property Tax, VAT and Income Tax; the European Union Report in 2010, which also recommended VAT as the best longer term tax option for TCI; and the Hutton Report by CARTAC in 2011 which calculated the VAT rate ranges and other parameters as stated in the Green Paper that would be necessary to maintain existing government revenues.
Based on all those studies and consultations with the UK Government and the European Union, both of whose financial support TCIG depends on, the decision to implement VAT was announced in the budget address in April 2011.
5) Will TCIG have the capacity to administer VAT?
By the time VAT would be introduced in April 2013 the VAT Unit would employ 21 trained and competent staff, together with an even larger group of trained VAT staff within Customs. This would see one VAT unit person for every 20 or so VAT registered businesses in TCI (the Green Paper suggests that there will be an initial tranche of 300 to 500 VAT registered businesses).
This level of advisors/compliance officers to businesses will assist both in the training and implementation work required before VAT begins in TCI, and also ensures that the Government is in a strong position to collect the revenues due.
This team will be brought together and intensively trained, including by Caribbean VAT experts CARTAC, benefitting from a bespoke VAT IT system and then work with the registered businesses to prepare them for the introduction of this simpler VAT system in April 2013.
6) Will businesses will be obligated to strict record keeping requirements?
The VAT registration threshold will be high enough to exclude businesses that may have difficulty in keeping the required records.
The threshold will be set at a level which captures the size of businesses that already maintain the required records and can comply with the following legislated VAT requirements:
• Copies of all original tax invoices, credit and debit notes received on purchases
• Copies of all tax invoices, sales receipts, credit and debit issued on sales
• Customs documentation relating to imports and exports
• Additional accounting records relating to any other taxable activities in TCI
7) What benefits can VAT offer over and above the existing tax system?
VAT is not an additional tax, rather it will replace several ordinances that are complicated and burdensome to administer both for businesses and Government:
(i) Hotel & Restaurant Accommodation Tax
(ii) Vehicle Hire Stamp Duty
(iii) Domestic Financial Service Tax
(iv) Telecommunications Tax
(v) Insurance Premium Tax
VAT will also partly replace import duty and thereby start reducing the excessive, unnecessary and unfair benefits some businesses receive via import duty concessions. VAT is a broad based tax and will spread the burden across a larger portion of the economy, including the service sectors which currently pay no sales-related tax.
8) How much extra revenue is expected to be generated from the introduction of VAT?
TCIG wishes to implement VAT in order to balance receipt of its revenues across the fiscal year, to broaden its tax base beyond front-line tourist facing businesses to better protect its income stream from the ebb and flow of any single sector.
There is also an issue of parity – why should one business pay tax and another of equal size not pay tax merely because of the sector it operates in?
So the most important point to make is that TCIG is not aiming to raise more revenue overall from VAT. This is all about widening the tax base, creating more stability in government revenues and a fairer tax system, with no concessions offered on VAT and reduced import duty concessions (by reducing import duty rates).
TCIG’s forward financial projections are showing an increase in TCIG's annual revenues post VAT implementation of $10m due to improved compliance and reduced tax leakage. Existing honest taxpayers would not be contributing to this extra $10m.
9) Will the VAT rate increase if it does not yield the anticipated revenue?
Sufficient consultancy work has been done to ensure planned revenues from VAT will be achieved. No guarantee can be given that future governments will not increase VAT or other taxes, but TCIG’s current financial forecasts show no need to increase any taxes over the years ahead in order to maintain present spending plans.
10) What is the Implementation cost of VAT for the TCIG?
Based on the Hutton study, it is estimated that VAT implementation and collection will cost TCIG less than 17% of the first year VAT generated revenue (excluding VAT on imports) and that this percentage will decrease significantly in the years following implementation.
11) What is the difference between being zero-rated for VAT and being exempt?
For supplies that are zero-rated, VAT registered businesses can still reclaim VAT Inputs paid both domestically and on imports. For exempt supplies, VAT is not charged on the sales, but VAT inputs cannot be reclaimed.
If a business is only making exempt supplies, that business will not be required to register and as such, will not be able to reclaim any VAT inputs.
12) Is TCIG considering Price Control with the introduction of VAT?
TCIG intends to publish prices of certain items prior to VAT implementation to discourage unnecessary price hikes. These prices will be monitored by TCIG and price control will be introduced only if necessary and as a last resort, as it’s hoped public and competitive pressures will generally make price control unnecessary.
13) How will low income and vulnerable individuals be protected by the VAT arrangements?
A basket of essential food and household items will be exempt from VAT, along with healthcare and educational supplies, so that these remain tax free.
14) Will VAT increase the tax burden upon TCI consumers?
No. As the following worked examples demonstrate, businesses should pass on their savings at import to their consumers, so there shouldn’t be any significant price increases and in some cases could show price reductions, such as where VAT replaces an existing tax (e.g. Accommodation Tax) and existing taxes on purchases cannot be offset.